Bonds News

TREASURIES-U.S. two-year yields soar to highest since November 2018 ahead of Fed decision

    * U.S. 10-year yield tops 3% for 3rd straight day
    * U.S. 2/10 yield curve flattens ahead of Fed
    * U.S. private sector hiring slows from month earlier
    * U.S. services sector growth unexpectedly slows in April

 (Updates prices, adds analyst comment, U.S. data, refunding
announcement, table, NEW YORK dateline)
    By Gertrude Chavez-Dreyfuss and Dhara Ranasinghe
    NEW YORK/LONDON, May 4 (Reuters) - U.S. Treasury two-year
yields rose on Wednesday to their highest in more than three
years, ahead of a widely anticipated half a percentage point
tightening by the Federal Reserve later in the session to
control soaring inflation.
    Since the beginning of the year, the two-year yield, the
most sensitive to the Fed's interest rate outlook, has gained
more than 200 basis points. It rose as high as 2.844%
on Wednesday, the highest since November 2018 and was last up 4
basis points at 2.8093%, not far from the psychologically
important 3% level.
    The last time the U.S. two-year yield touched 3% was in June
    Aside from raising interest rates, the Fed is also expected
to announce the start of the reduction of its $9 trillion
balance sheet by as much as $95 billion per month.
    "If the Fed follows expectations this afternoon, the
potential for volatility and illiquidity this afternoon is
nearly as big as it would be for a surprise," Jim Vogel, senior
rates strategist at FHN Financial in Memphis, Tennessee, wrote
in a research note.
    "Flattening will accelerate if (Fed Chair Jerome) Powell
does not turn aside questions about a 75 basis-point hike at
some point in coming meetings. The other 'surprise' the rest of
the week is whether bearish investors follow any less-than-100%
hawkish guidance from the press conference, perhaps via a
discussion of risks to the U.S. economy," Vogel added.
    The benchmark 10-year yield topped 3% for a third
consecutive day, hitting 3.011%, the highest since
December 2018. The yield was last up 4 basis points at 2.995%.
    As the two-year yield accelerated, the yield curve
flattened, with the gap between two-year and 10-year year notes
narrowing to 17.5 basis points.
    "In terms of their guidance, it will be interesting to see
whether we get a sense of urgency in getting rates back to a
neutral level," said Chris Scicluna, head of economic research
at Daiwa Capital Markets in London. "Also, we'll see if the Fed
is mindful of downside risks to growth and whether they could
inadvertently push the economy into recession."
    U.S. data on private-sector payrolls and the services sector
were released as well on Wednesday, but the Treasury market
showed little reaction as markets prepared for Fed action later.
    The ADP National Employment Report showed a broad slowdown
in hiring, with job gains in the leisure and hospitality
industry also the smallest since late 2020.
    U.S. services industry growth also unexpectedly slowed in
April, data showed, with employment contracting for the second
time this year, while a measure of input prices raced to a
record high.
    Also on Wednesday, the U.S. Treasury announced further
reduction in auction sizes, for its coupon issuance, with the
largest cuts coming in the seven-year and 20-year maturities.
    The Treasury said it expects to cut the size of 2-, 3- and
5-year note auctions by $1 billion each per month over the
coming quarter, while 7-year auctions will be cut by $2 billion
per month in the same period.
      May 4 Wednesday 10:38AM New York / 1438 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.9375       0.9528    0.028
 Six-month bills               1.46         1.4913    0.025
 Two-year note                 99-102/256   2.8134    0.043
 Three-year note               99           2.9818    0.034
 Five-year note                98-184/256   3.0287    0.026
 Seven-year note               98-224/256   3.055     0.031
 10-year note                  90-144/256   2.995     0.037
 20-year bond                  87-72/256    3.2516    0.041
 30-year bond                  84-164/256   3.0372    0.031
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        32.00         0.75    
 U.S. 3-year dollar swap        20.00         0.75    
 U.S. 5-year dollar swap         9.25         0.75    
 U.S. 10-year dollar swap        7.75         0.50    
 U.S. 30-year dollar swap      -24.00         0.25    
 spread (Reporting by Gertrude Chavez-Dreyfuss in New York and Dhara
Ranasinghe in London; Editing by Saikat Chatterjee and Will